The South African Revenue Service (SARS) is in the process of amending the rule to facilitate customs related submission resulting from transfer pricing adjustments ("TPA").

The South African Revenue Service (SARS) is in the process of amending the rules to facilitate customs-related submissions resulting from transfer pricing adjustments ("TPA").

Over the years, SARS has not had a formalised guide on how to disclose TPAs and on adjusting the customs declarations (bills of entry) affected. It is in this regard that SARS now seeks to amend the Rules under the Customs and Excise Act, 1964, ("Customs Act") to provide clarity and certainty for importers impacted by retrospective TPA. This process is relevant on how to account for previous customs declarations.

Retrospective transfer pricing adjustments

At the end of a financial year, multinational companies may implement transfer pricing adjustments relating to inter-company trading/transactions. Such action is ordinarily aimed at aligning with a set arm's length price in terms of a transfer pricing policy.

The traditional focus on TPAs tends to be on profits and considers income tax implications. With the implementation of year-end TPAs, there is often an unintended overlook on the customs-related implications. Such overlook(s) can have dire consequences for those entities with inter-company transactions involving the cross-border movement of goods.

The SARS has since noted the end impact of TPAs on the pricing of goods previously imported, i.e. creating retrospective customs valuation uncertainty that can result in underpayment of import VAT and customs duty. The Customs Act therefore requires importers to disclose the retrospective TPAs. Importers are further required to make submissions on the impact of such TPAs from a customs valuation, duty, and VAT perspective.

The Customs Act makes provision for the disclosure of a credit or debit note that has an impact on the value of an original invoice previously used to enter goods for import purposes. Such disclosure must be done within one month of receipt and be coupled with details of the circumstances of such adjustment. The mandatory reporting and adjustments are intended to ensure retrospective compliance and accuracy about the validity of the declared invoices, customs values, customs duty and VAT.

Failure by importers to notify SARS to the mandatory disclosure of the year-end TPA could result in retroactive invalidating of a customs declaration. SARS could as result demand additional payments of customs duty and VAT. Penalties and interest could also be payable (on failure to disclose).

Rules amendments

The proposed Rules amendments are to address and formalise the process of submission of the notice of amended invoices or debit or credit notes where customs value is affected by transfer pricing adjustments.

If/when the proposed amended rules are finalised and approved, the TPAs are to be submitted to SARS by submitting a letter of notification on the letterhead of the importer –

  • via e-mail to the e-mail address indicated on the SARS website for this purpose; or
  • by hand to any customs office.

The Rules would require that the letter to SARS be accompanied by the following –

  1. a letter of authority of the person making the submission;
  2. the relevant amended invoice or debit or credit note issued by the exporter;
  3. the applicable transfer pricing policy and compensation calculation detailing how transfer prices are determined and adjustments are to be made:
  4. a spreadsheet reflecting the affected import entries with full details including the following:
    1. the numbers of all bills of entry affected by changes in customs value declared due to the relevant transfer pricing adjustments;
    2. the tariff heading of the affected goods;
    3. the value of the affected goods;
    4. the adjustment factor used to determine the adjustment to the value as reflected in the transfer pricing policy referred to in subparagraph (3);
    5. the effect of the changes indicated on the customs duty and VAT in respect of the relevant bill of entry; and
    6. a declaration by the importer or that importer's authorised representative that the particulars provided are true and correct;
  5. purchase and sale agreements; if applicable;
  6. distribution agreements together with all amendments and annexures, if applicable;
  7. signed annual financial statements for the relevant adjustment period;
  8. segmented financial data relating to the various divisions within the importer's business;
  9. royalty and licence fee agreements, if applicable;
  10. a summary of VAT 201 returns for the adjustment period; and
  11. any other relevant documentation required for purposes of validating the retrospective adjustments and assessing the impact of such adjustments on the customs value, duties and VAT payable.

The proposed Rules will further require an importer who has submitted a notification to comply with any further instructions issued by SARS to such importer. The instruction may relate to further information to be supplied; steps to be followed for payment of any duties and/or VAT payable to SARS.

Take Away

The proposed Rule amendments are not different to the industry practice currently used to report and adjust the TPAs. The major positive that they would bring is the definitive list of supporting documents required, and uniformity as different officials would at times have different requests (depending on the case officer allocated). The proposed Rules will therefore bring about certainty in the process and for customs clients to submit all that is required at once, i.e. rather than the back and forth that would ordinarily be experienced post-submission.

In the recent past the South African customs environment has become highly regulated. As such, importers that are impacted by TPAs are required to be more vigilant in complying with transfer pricing and customs laws. It is in such regard that one needs to partner with specialists in the field of customs and be familiar with the regulatory requirements to identify risks, non-compliance, and savings opportunities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.